Natural rate of interest
Okay kiddo, let me try and explain to you what the 'Natural Rate of Interest' means.
Imagine you have some money saved up and you want to put it in the bank. The bank will give you a certain percentage of interest on your money. This interest rate is called the 'natural rate of interest'.
Now, the natural rate of interest is the rate at which the economy neither booms nor contracts. It is a rate that allows for stable growth in the economy without causing inflation. Think of it like a speed limit on the highway. If you go too fast, you might cause an accident. If you go too slow, you might cause a traffic jam. So, the natural rate of interest is like a speed limit for the economy, it helps keep things going smoothly.
But why does this matter? Well, the natural rate of interest affects how much people want to save and how much they want to borrow. If the rate is too high, people will want to save more money and not spend it, which can slow down the economy. If the rate is too low, people will want to borrow more money and spend it, which can cause inflation.
So, central banks and governments try to set the natural rate of interest at a level that will keep the economy growing at a steady pace without causing inflation or recession. And that's what the natural rate of interest is all about!
Imagine you have some money saved up and you want to put it in the bank. The bank will give you a certain percentage of interest on your money. This interest rate is called the 'natural rate of interest'.
Now, the natural rate of interest is the rate at which the economy neither booms nor contracts. It is a rate that allows for stable growth in the economy without causing inflation. Think of it like a speed limit on the highway. If you go too fast, you might cause an accident. If you go too slow, you might cause a traffic jam. So, the natural rate of interest is like a speed limit for the economy, it helps keep things going smoothly.
But why does this matter? Well, the natural rate of interest affects how much people want to save and how much they want to borrow. If the rate is too high, people will want to save more money and not spend it, which can slow down the economy. If the rate is too low, people will want to borrow more money and spend it, which can cause inflation.
So, central banks and governments try to set the natural rate of interest at a level that will keep the economy growing at a steady pace without causing inflation or recession. And that's what the natural rate of interest is all about!